Is a corporate aviation subsidiary's purchase of a new $30 million jet exempt from sales tax as a 'commercial aircraft,' when the plane is used mainly to fly employees and guests of affiliated companies who are charged an intercompany fee for using it?

Plain-English summary

Philip Morris Management Corp., a corporate aviation subsidiary of Philip Morris Companies, contracted to buy a new $30.5 million Gulfstream IV jet, trading in an old Gulfstream IV as part of the deal. Once delivered, the new plane would be hangared at White Plains airport and used predominantly by employees of Philip Morris affiliates (and occasionally their customers, suppliers, and business contacts). Petitioner runs its aviation operation like a service business: it keeps full operational control -- its own pilots, flight staff, scheduling, maintenance, finances -- and charges each affiliate an intercompany fee for its employees' use of the plane, based on IRS-prescribed Standard Industry Fare Level (SIFL) rates, plus an annual true-up allocating essentially all of the aircraft's fixed and variable costs across affiliates based on flight hours actually used. Petitioner asked whether this purchase and use qualifies for New York's commercial aircraft exemption.

New York exempts "commercial aircraft primarily engaged in ... commerce" from sales and use tax, and defines a commercial aircraft as one used primarily either to transport people or property for hire, or by its purchaser to transport its own property in the conduct of its business (or both). The key numeric threshold, drawn from the Department's own prior Pasquale & Bowers ruling, is that more than 50% of the aircraft's use must go toward transporting people or property for compensation that reasonably reflects the actual cost of operating the aircraft. Since Petitioner's corporate policy is to charge virtually all use of its aircraft to affiliates via the SIFL-based and cost-allocation charges described, and it expects to continue that same policy for the new Gulfstream IV, the plane meets that "primarily engaged in commerce" threshold. The Department held both the purchase of the new aircraft and the affiliate usage charges exempt from sales and use tax -- the purchase because it's a commercial aircraft under § 1115(a)(21), and the intercompany charges because they're payments for a nontaxable transportation service, not a taxable rental of tangible personal property, given that Petitioner (not the affiliates) retains full dominion and control over the plane's operation.

What this means for you

Corporate aviation subsidiaries and flight departments

If your aviation entity retains full operational control of the aircraft (your own crew, scheduling, maintenance) and charges affiliates a fee that reasonably approximates your actual cost of providing the flights -- particularly if you can show that more than half of total usage is billed out this way -- your aircraft purchase and the ongoing intercompany charges can both qualify for the commercial aircraft exemption, even though the "customers" are all related companies rather than unrelated third parties.

Multi-entity corporate groups sharing aircraft

The exemption doesn't depend on flying unrelated parties -- transporting a corporate family's own employees, customers, and business contacts for a genuine cost-based fee counts as commerce for this purpose, as long as the operating entity keeps real operational control rather than simply handing the affiliate the keys (which would look more like a taxable rental).

Accountants and tax professionals

The >50%-of-use-for-genuine-compensation threshold from Pasquale & Bowers is the workhorse test here; also note the parallel holding that the affiliate usage charges themselves are exempt as charges for a nontaxable transportation service (not equipment rental), which depends specifically on the operating entity retaining dominion and control over the aircraft's operations and maintenance.

Common questions

Q: Can a company's own aviation subsidiary qualify for the commercial aircraft exemption if it only flies employees of related companies?
A: Yes, as long as more than 50% of the aircraft's use is for transporting people (or property) for a fee that reasonably reflects the actual cost of operating the plane -- the exemption doesn't require flying unrelated third parties.

Q: Are the intercompany usage charges billed to affiliates taxable as equipment rental?
A: No, as long as the aviation subsidiary retains full dominion and control over the aircraft's operations and maintenance (its own pilots, scheduling, and finances) -- in that case the charges are for a nontaxable transportation service, not a taxable rental.

Q: Does using IRS SIFL rates for the intercompany charge matter to the analysis?
A: The SIFL-based charge, together with the year-end cost-allocation true-up covering nearly all of the aircraft's costs, is what the Department pointed to as showing the compensation reasonably reflects the actual cost of operation -- a key part of meeting the "primarily engaged in commerce" test.

Q: Can another corporate aviation department rely on this exact result?
A: No. This advisory opinion binds the Department only for the petitioner on the facts described, though it applies the same commercial-aircraft framework the Department set out in its earlier Pasquale & Bowers opinion.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(17) (definition of "commercial aircraft")
• Tax Law § 1115(a)(21) (exemption for commercial aircraft primarily engaged in commerce)

Prior rulings referenced:

• Pasquale & Bowers, Adv Op Comm T&F, Aug. 1, 1996, TSB-A-96(49)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_38s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(38)S
Sales Tax
October 11, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000525B

On May 25, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Philip Morris Management Corp., 120 Park Ave., New York, New York 10017-5592.
The issue raised by Petitioner, Philip Morris Management Corp., is whether its purchase and
use of an aircraft, as described below, are exempt from sales and compensating use tax pursuant to
Section 1115(a)(21) of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner, a wholly owned subsidiary of Philip Morris Companies Inc. (“MO”), entered into
a contract (the “Contract”) with the Gulfstream Aerospace Corporation (“GAS”) on November 16,
1999 to purchase a new Gulfstream IV aircraft for $30,497,000. Under the terms of the Contract,
GAS will deliver the aircraft to Petitioner in Bradley Field, Windsor Lock, Connecticut. It is
expected that title to the aircraft will pass to Petitioner in Connecticut in the fourth quarter of 2000.
The Contract provides for a series of progress payments and permits Petitioner to render an
old Gulfstream IV in exchange as follows. Upon execution of the Contract on November 16, 1999,
Petitioner paid $12,227,000; on December 31, 1999, Petitioner paid $7,000,000; and on preliminary
acceptance of the new aircraft in February 2000, Petitioner paid $1,770,000. Petitioner will pay
$7,000,000 on June 30, 2000 and will make a final payment of $2,500,000 plus the value of any
work change requests upon delivery of the completed Gulfstream IV aircraft. Petitioner elected in
February, 2000, to trade its old aircraft, and will transfer its old aircraft to GAS no later than 30 days
after the final acceptance of the new aircraft for a credit of $19,000,000. Since this credit exceeds
the remaining balance of the payments required to be paid by Petitioner, GAS has agreed to refund
to Petitioner the difference between that agreed $19,000,000 credit and the remaining balance owed
by Petitioner.
After it takes title to the new Gulfstream IV, Petitioner expects that it will hangar this aircraft
at the White Plains airport, where it will be available for use predominantly by employees of
affiliates of Petitioner, and perhaps customers, suppliers and other persons transacting business with
such affiliates. All of these affiliates are subsidiaries of MO. Petitioner’s corporate policy is to
charge the costs of operating the aircraft to its affiliates that use the aircraft.
Use of Airplane
Petitioner is a service company that provides aircraft services to its parent, MO, and to MO’s
subsidiaries and affiliates. Petitioner also owns two other aircraft for which it has recently paid New

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TSB-A-00(38)S
Sales Tax
October 11, 2000

York sales and use tax. Petitioner intends to operate the new Gulfstream IV aircraft in a manner
similar to its operation of its old aircraft. Thus it plans to continue operating under Part 91 of the
Federal Aviation Administration (“FAA”) Regulations, and will be responsible for all flight services,
scheduling, fuel, maintenance, pilots and flight staff for the new aircraft, as it was for its old aircraft.
Petitioner will retain complete dominion and control over the new aircraft, including operations and
maintenance. It has and will continue to maintain it own staff, and is and will be responsible for its
own finances and administration. Petitioner has operated all of its other aircraft in a similar manner.
Petitioner’s corporate policy encourages all of MO’s eligible employees, including employees
of its affiliates, to use its corporate aircraft in lieu of commercial flights, where possible, and charges
the user’s corporate employer an intercompany charge based on Internal Revenue Service (“IRS”)
prescribed Standard Industry Fare Level (“SIFL”) rates. The SIFL charge is also used for budgetary
reasons to quantify how much each affiliate’s employees have consumed of their annual travel
budget allowance. Virtually all of the use of Petitioner’s aircraft is charged out in this manner, and
Petitioner expects to maintain this policy, or a substantially similar policy with regard to the new
Gulfstream IV aircraft. In the past, an insubstantial portion of the use of Petitioner’s old aircraft was
made by former employees of MO; in addition, elected officials have used the old aircraft and have
paid the appropriate charges as mandated by the Federal Election Laws. Similar usage of the new
aircraft may occur in the future but it is expected to be minimal.
At the end of the year, Petitioner charges out all of its expenses relating to the aircraft it
owns, including both fixed and variable costs (other than the SIFL charge described above), to its
affiliates. The charge is allocated between the affiliates in proportion to the flight hours that each
affiliate’s employees used the aircraft. This formula has resulted in an intercorporate allocation of
almost all of the aircraft’s costs as measured by flight hours and this policy is expected to be
continued with regard to the cost of the new Gulfstream IV aircraft.
Applicable Law
Section 1101(b)(17) of the Tax Law defines the term “commercial aircraft” as:
Aircraft used primarily (i) to transport persons or property, for hire, (ii) by the
purchaser of the aircraft primarily to transport such person’s tangible personal
property in the conduct of such person’s business, or (iii) for both such purposes.
Section 1115(a)(21) of the Tax Law provides an exemption from sales and use tax for:
Commercial aircraft primarily engaged in intrastate, interstate or foreign
commerce, machinery or equipment to be installed on such aircraft and property used
by or purchased for the use of such aircraft for maintenance and repairs and flight
simulators purchased by commercial airlines.

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TSB-A-00(38)S
Sales Tax
October 11, 2000
Opinion
Where over fifty percent of the use of Petitioner’s new Gulfstream IV aircraft is devoted to
transporting employees, customers and potential customers of related companies for compensation
as described above, and the compensation reasonably reflects the cost of operating the aircraft, the
aircraft will be considered a commercial aircraft primarily engaged in intrastate, interstate or foreign
commerce, within the meaning of Section1115(a)(21) of the Tax Law. See Pasquale & Bowers, Adv
Op Comm T & F, August 1, 1996, TSB-A-96(49)S. The purchase and use of this aircraft in such
case will be exempt from New York State and local sales and compensating use taxes.
Petitioner represents that it will retain complete dominion and control over the operations and
maintenance of the new Gulfstream IV aircraft. Petitioner will be responsible for all flight services,
scheduling, fuel, pilots, and flight staff for the new aircraft. Based on this representation, the charges
to the related companies for use of the new aircraft will be exempt from tax as charges for the
provision of a nontaxable transportation service. See Pasquale & Bowers, supra.

DATED: October 11, 2000

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.